Six Questions You Should Ask Before Refinancing

Refinancing your mortgage can be a great way to save money, but it's not a sure thing. Before you take the plunge, ask yourself these six questions and ensure that you aren't making a major money mistake.

1. Is Time an Issue?

If you're already busy with work, or other tasks, its best to wait until you have more time to deal with the details of refinancing. When you're busy or stressed out, you might make a mistake, missing something important in the fine print or falling prey to a bad loan. Refinancing should be done with the same extreme care you put into getting your original mortgage - it's just as big of a decision. What's more, don't look at refinancing as a quick way to come up with some needed cash. The refinancing process takes a bit of time, so look elsewhere if you're in need of cash.

2. Will I Come Out Ahead?

Everyone who chooses to refinance thinks they will come out ahead. But spend time on the numbers to ensure a refinance will make financial sense. Any number of things could happen including relocation, or a family emergency that would influence your current situation and cause you to default on your refinancing plan. It's impossible to predict with complete accuracy whether you will own the home long enough to come out ahead on a refinance, you can only make an educated guess. Since it is possible to lose money on a refinance, it's important to consider whether you can afford that risk.

3. Can I Resist Rolling Other Cheaper Debt into My Mortgage?

It might sound like a good idea to pay off some of your other debts by refinancing and rolling them into your mortgage. Why owe money to multiple people when you could have just one debt and just one major monthly payment at a lower interest rate? But be sure the debt your looking and rolling over isn't a cheaper solution. Let's use an auto loan as an example. Auto loans often have higher rates than mortgage loans, but they also have fairly short terms. If you take that short-term loan and turn it into a 30-year loan, even at a lower interest rate, you're likely to end up paying more in interest.

4. Can I Qualify for the Rate I Want?

The current refinance interest rates give you a general idea of what interest rate you COULD get. The details of your specific situation, such as your credit score and the type of loan you want to refinance, will affect the rates available to you. If you don't qualify for the lowest advertised rates, is it still worth it to refinance? Research a few lenders to see what kind of rate you can expect.

5. Can I Meet Today's Higher Lending Standards?

If your last mortgage was closed during a housing bubble, you may be stunned by the borrower requirements and documentation requirements to refinance in today's market. Many lenders want you to have a higher credit score and ask you to provide full documentation of your financial situation, including pay stubs, bank account statements, and personal tax returns.

6. Can I Prevent Getting a Bad Loan?

If you're not savvy when it comes to money, refinancing might not be in your best interest. If you know you have a good loan, you may not want to roll the dice and see what you end up with when you refinance. If you already have a bad loan, refinancing will be useless if you just end up in another bad loan. Also, there's always the risk of bait and switch - just like when you first bought your home, a lender may quote you one interest rate and set of fees on the day you decide to work with them and give you something entirely different when it's time to sign the paperwork.

Finally...

Yes, refinancing can be a way to save money. If you do it right, you can improve your short-term cash flow while also increasing your long-term net worth. But a bad refinance can put you in a situation where the only person benefiting is the loan officer. If your answer to any of the questions in this article is "no," you may be better off looking for simpler ways to decrease your expenses, such reviewing your insurance policies, cutting your grocery bill or looking for ways to lower other household bills.